Hutton report: A punishing pension plan

More money to get less pension – after working longer. There's no doubt that public employers have a tough sales job on their hands, and – despite a few worthwhile ideas – yesterday's report from the New Labour peer turned coalition adviser, John Hutton, barely sweetens the pill. The taste will be bitter for many a modestly paid public servant planning a modest retirement, as the unions explained yesterday.

Their frustration is redoubled because cuts are being superimposed on a 2005 deal to raise pension ages, a deal supposed to make the arithmetic sustainable once and for all. Thanks to the energetic posturing of the CBI's Digby Jones at that time, it was reported as a craven surrender, as existing staff held on to their existing terms. But the deal, whose brokers included John Hutton himself, required the new starters – who constitute the majority after a decade or so – to work five extra years to get a full pension. That one change entirely arrested the rise in costs, and Lord Hutton's own analysis yesterday showed that even if things stay as they are, public pensions will consume not a rising but a falling share of national income.

Public sector unions, however, would be unwise to rely on this logic carrying the day. They represent the minority, at a time when the remaining final salary schemes in the private sector are closing at a record rate, as a new survey has just shown. Regardless of whose fault the swollen deficit may be, and regardless of the dangers of immediate slash and burn, there will come a point where it must be reduced, and pain will be felt far and wide.

Even if pension costs are not spinning out of control, they will get squeezed in a climate where voters will expect every last pound of state spending to be milked for all its worth. In particular, with lives that are not merely longer but also healthier for longer, there is a case for saying that the calculation, including for current staff, should be based on a longer working life. Indeed, Lord Hutton might even be criticised for proposing such a sweeping waiver for uniformed servicemen, who, he insists, must always be able to draw a pension at 60, even though his own figures show that most of them move on to other paid jobs, as opposed to a dependent dotage.

His nervousness here is one sign of the fraught politics, which will be dominated by two decisions that the coalition has already made – to ratchet down the real value of pensions by excluding housing from the cost-of-living adjustment, and to demand that public sector workers cough up an extra 3% of their frozen salaries towards their schemes. With these twin storm clouds dominating the horizon, rational appraisal of the Hutton proposal to shift the basis of the pension calculation from final salary towards average pay over the whole career is unlikely to get much airtime. That is a shame, seeing as it could well be a fairer way to calculate who gets what, with the potential to benefit women. But it's always important to read the small print with pensions, and this will depend on decisions that the government has yet to make about how quickly pension rights are clocked up. It will need to be faster, or it will not merely be high flyers who get to the top, but anyone who has ever got a promotion or a mere increment for experience who may find they are short-changed. The context is not one in which ministers can expect the benefit of the doubt.

Inevitable change may be, but when a typical local government pension is just £3,000 a year, as against around £4,000 in the NHS, it is going to run into resentment. All the more so since the cuts have been driven by the fallout from misplaced bets in the City that were laid by people who really can look forward to retiring in gold-plated style. The coalition had better hope it can divide state employees from the rest of the workforce, since most public servants may soon be demanding that this government is pensioned off.

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